Problem 2Marty purchases two goods, food and clothing. He has a diminishing marginal rate ofsubstitution of food for clothing. Let x indicate the amount of food consumed and y theamount of clothing. Suppose the price of food increases from P, to P2. On a clearly labeledgraph, illustrate the income and substitution effects for each of the following scenarios:a) Food is a normal good.b) The income elasticity of food is zero (i.e. Marty's consumption of food does not changein response to his income).c) Food is an inferior good, but not a Giffen good.This question is based on problem 5.9 from Besanko and Breautigam. You can (but don't haveto) assume that Marty's consumer choice problem has an interior solution both before and afterthe price change.

Normal goods refer to those goods whose demand increases with the increase in the income of the…

Answered: Marty purchases two goods, food and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Slutsky.Consider a consumer with utility function U (x, y) = 2xy. Her income is I = 15, andprices are given by px = 2, and py = 3. Address the following questions:a) Find the demand functions.b) Find the optimal bundle.c) Find the price elasticity of good yAssume the price of good x increases up to px = 3.d) Find the income effect, the substitution effect and the total effect.e) Determine whether the good x is normal or inferiorf) Determine whether the good x is a Giffen goodg) Are goods x and y substitutes, complements, or independent goods? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
A consumer is always indifferent between one unit of good A and one unit of good B, no matter how much A or B she consumes. Initially A is cheaper. Then, the price of good A increases, but it is still cheaper than B. Discuss the substitution, income and total effect of this price change.
Sergei splits his consumption between baseball bats and cameras. The price of baseball bats rises. If Sergei responds to this price increase by reducing his purchases of cameras, does this imply that he has a stronger income effect or a stronger substitution effect? Explain. If Sergei responds to this price increase by purchasing fewer baseball bats but more cameras, does this imply that he has a stronger income effect or a stronger substitution effect? Explain.
The income effect of an increase in the price of a normal good that a consumer buys on a regular basis will be ___________ and the substitution effect will be _________.a) positive; negativeb) negative; negativec) negative; positived) positive; positivee) One cannot tell.
1) Max chooses to purchase movie tickets and restaurant meals every week with his $100. If the price of a movie ticket is $20 and the price of a restaurant meal is $25, then the slope of his budget constraint will be, a) 1/5 b) -1/5 c) 4/5 d) -4/5 2) Marginal rate of substitution(MRS) is the rate at which consumer is willing to trade one good for another. It must be true that: a) MRS is the slope of an indifference curve in reference to a particular bundle of goods. b) MRS is not the same along an indifference curve that is of usual shape. c) MRS is same along an indifference curve that is of usual shape. d) Both a) and b).
Rick consumes 2 goods, Chicken McNuggets (M) with Szechuan sauce (S). His utility function is U(M, S) = M2/3S1/3 and his income is m. The price of Chicken McNuggets is p, and the price of Szechuan sauce is 1. d. Use the equation from part (c) and the budget constraint from part (a) to find Rick’s demand for each of the two goods. e. Suppose m=100 and p=1. How much of each good does Rick consume? Draw a graph showing Rick’s budget constraint and indifference curve passing through his chosen consumption bundle. f. Suppose m=100 and p=2. How much of each good does Rick consume? On the same graph from part (e), show Rick’s budget constraint and indifference curve passing through his new chosen consumption bundle.
For Sara, ramen noodles are a normal good, however Sean considers ramen noodles to be inferior. If Sara and Sean have the same amount of income, Sean's demand for ramen noodles will be less price elastic than Sara's. Please explain why in detail using the substitution effect and income effect graphs.
PROBLEM 3 – Slutsky Equation, Income Effect, Substitution Effect, and Total Effect There are two goods which quantities are to be denoted by x and y, while prices are denoted by px and py, respectively. There is a consumer whose income is to be denoted by I and utility by u. His expenditure function is known to be: *see image* Using slutsky equation, decompose the effect of an infinitesimal increase in Px on demand of good x.
Questions 6 (Demand). When the price of x1 is $8 and the price of x2 is $5, Jenny consumes 20 units of x1 and 10 units of x2. Suppose that when the price of xX2 increases to $7, Jenny consumes 25 units of x1. a) What type of goods are x1 and x2? b) How many units of x2 does Jenny consume after its price increases? Hint: Calculate her income with the first allocation of goods. Questions 7 (Slutsky Equation and Consumer Surplus). Robert's utility function for x and xa is:
For the utility function, U = 2x1/2 + y What are the income and substitution effect of price changes in Px and Py respectively?

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